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LONDON (Reuters) - Government cost-cutting and mistakes by civil servants contributed to the mishandling of the award of a key British rail franchise that had to be torn up weeks after being granted, an inquiry found.
The 13-year contract for the West Coast Main Line, due to start in December, was originally given to FirstGroup Plc, but the government was forced to pull the award after flaws were found in the bidding process.
"I do not hide from the seriousness of these findings," Transport Secretary Patrick McLoughlin said in response to Thursday's report. "They make extremely uncomfortable reading for the department. They must and will be acted upon."
The inquiry's findings came out after the government confirmed on Thursday that the West Coast Main Line's incumbent operator Virgin Rail would continue to run the service for up to 23 months.
The franchise debacle is damaging for Britain's ruling Conservative Party, which began its programme of rail privatisations in the 1990s. The project has been dogged by fatal accidents, financial crises and political infighting.
McLoughlin, however, laid much of the blame for franchise U-turn at the door of civil servants, saying that ministers made the original decision in August after being given inaccurate information.
Flaws in the process came to light after Virgin Rail, the losing bidder, mounted a legal challenge to FirstGroup being awarded the contract with a 5.5 billion pound ($8.9 billion) bid.
The final report into what happened, led by Centrica chief executive and Department for Transport board member Sam Laidlaw, found that the department wrongly calculated the amount of risk capital that bidders would have to offer to guarantee their proposals against default.
As well as individual errors, Laidlaw's report said that cost-cutting and management changes at a time when the department was taking on other large projects - including high-speed rail, Crossrail and the Olympics - made it more vulnerable to missing errors. It also said that a squeezed deadline gave insufficient time to consider concerns that were raised.
However, Laidlaw said that he made "no criticism" of engineering consultancy WS Atkins, the shares of which fell 4 percent when it announced in October that its own advisory role in the process would be investigated.
Laidlaw's report recommended that future competitions are given clear timeline and are better managed with a simpler structure, and with a single director general appointed to look after all rail franchising.
A second report by Eurostar chairman Richard Brown into the overall franchising system is "well advanced" and is expected by the end of the year, McLoughlin said.
Opposition transport secretary Maria Eagle said that it was wrong to pin the blame on individual civil servants.
"It was decisions and failures by ministers that led to the collapse of the rail franchising at huge cost to the taxpayer," she said.
With the current franchise due to expire next week, the government said that it had agreed a deal for Virgin to run the West Coast service for up to 23 more months, giving the Department for Transport time to reconsider the tender process.
The government had originally suggested that it expected Virgin to operate the line for up to 13 months as an interim measure.
Virgin Rail, a joint venture between Richard Branson's Virgin Group and Scotland-based Stagecoach Group, may have its new agreement terminated early if a long-term franchise is ready to begin before November 2014, Stagecoach said.
Stagecoach said that Virgin Rail planned to bid again for the long-term franchise when the tender comes up. ($1 = 0.6214 pound)
Additional reporting by Sarah Young; Editing by Paul Sandle and David Goodman