ScotRail runs regional services and sleeper trains to London

The franchise to operate internal train services in Scotland as well as sleeper trains to London is worth about �1.75bn over seven years.

FirstGroup, which operates an extensive network of bus services, was cleared to bid by the Competition Commission.

Current owner National Express, and Arriva were also bidding to run the franchise, which begins on 17 October.

There has been speculation that Arriva submitted the cheapest bid with concerns that this could affect services.

National Express was keen to hang onto the franchise.

Its tenure began well but some teething problems with new trains and two bouts of industrial action led to passenger frustration.

When we are looking at services it's about what the customer wants and that we are delivering value for money for the taxpayer Gordon Dewar FirstGroup Check out FirstGroup's share price

BBC Scotland's Business correspondent Jamie McIvor said the decision was a shock as "the smart money" had been on National Express to retain the franchise.

Transport Minister Nicol Stephen, the MSP for Aberdeen South, said he hoped the decision would lead to an improvement in services.

He said: "The decision to appoint FirstGroup as the preferred bidder demonstrates our commitment to providing the best deal for passengers and the Scottish economy.

"Their bid offered the highest quality overall and the best value for money.

"We want immediate improvements for rail passengers in Scotland but also new services which get better year after year."

Stock markets reacted positively, with FirstGroup shares gaining nearly 3% during the first hour of trading on the London Stock Exchange.

The company outlined how its bid was based on "robust plans" to improve performance and address key issues such as the use of public funds.

Value for money

Company spokesman Gordon Dewar said: "When we are looking at services it's about what the customer wants and that we are delivering value for money for the taxpayer."

While FirstGroup chief executive Moir Lockhead claimed the contract win was good news for all concerned.

He said: "This is terrific news for us and our new customers.

"We were the only Scottish company to be short listed and are very proud to be given the opportunity to run Scotland's railways.

"We have comprehensive plans to develop Scotland's rail service and a real enthusiasm to get started."

There is a big issue about how much infrastructure investment will come through from the executive to back up improved train services David Spaven Transform Scotland

The Strategic Rail Authority, which was at the heart of awarding the contract, said the franchise decision was a "critical milestone" for rail transport north of the border.

Chairman Richard Bowker said: "This franchise will deliver greater certainty for the passenger, clarity for the franchisee and stability for the investors.

"It should bring about an overall improvement in punctuality with further passenger benefits including better customer information and station cleanliness."

Rail Passengers Committee Scotland director Robert Samson said: "Passengers will want to see real benefits from the executive's substantial investment in the new rail franchise.

"They want improved timekeeping, comprehensive information at stations and better onboard train and customer service.

"The task facing the franchisee is to deliver a passenger-focused railway."

'Stuck on a siding'

On the political front, Scottish National Party transport spokesman Kenny MacAskill wished the company well.

But he warned real improvements would only happen when Scotland took control of its own rail network.

He said: "Investment, including cash taken from Scottish taxpayers, is being funnelled by the billion into services south of the border.

"Until we return power over the rail network to Scotland, we will remain stuck on a siding, struggling to meet public demand."

While David Spaven, spokesman for the transport campaign group Transform Scotland, said it would be interesting to see how FirstGroup balanced its rail and bus services.

He said: "It is a very interesting outcome, but it needs to be emphasised that ScotRail only controls the train services, it does not control the track.