Government mistakes over the West Coast rail contract will cost the taxpayer £40 million in refunds to the firms that had bid for the franchise, it emerged this morning. In a midnight press release, Department for Transport (DfT) secretary Patrick McLoughlin admitted that calculation errors gave a distorted picture of the controversial winning bid, which came from travel operator FirstGroup. The company’s deal to run the line has now been scrapped, leading to a 15% drop in its share price.

McLoughlin admitted to serious management problems in the department and promised thorough investigations into the debacle. “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,” he said. “A detailed examination by my officials into what happened has revealed these flaws [which] 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.”

Transport permanent secretary Philip Rutnam added: “The errors exposed by our investigation are deeply concerning. They show a lack of good process and a lack of proper quality assurance.” Several civil servants have already been suspended over the errors.

Sir Richard Branson – boss of incumbent West Coast operator Virgin Trains, who was furious about the contract switch to FirstGroup – wrote on his blog today: “From the moment we found out that FirstGroup had been made the preferred bidder with a completely unrealistic bid, we questioned the way the offers had been assessed, and asked the government to review and explain how it came to its decision. We were convinced the process was flawed, but despite our best efforts we were met with silence by the DfT. We also asked for government to appoint an independent advisor to look at the situation, which was turned down. Reluctantly we were forced to seek a judicial review. Tomorrow the DfT were meant to have given their evidence to the court.”

He added: “I am pleased to say that the DfT has looked at all of the facts and found significant flaws in the way its officials handled the process. They have basically acknowledged that what we had been saying is correct … procedures were not followed and ‘deeply regrettable and completely unacceptable mistakes’ were made by the department.”

With opposition leader Ed Miliband accusing the Coalition of incompetence in his keynote conference speech yesterday, the DfT’s admission of management failings will hand critical ammunition to the Labour Party.