ARRIVA Trains suffered a blow last night when its main rival to run Scotland's rail service, First Group, was named as preferred bidder.

Both companies submitted bids to run the Scotrail service, which is currently under the control of National Express. The contract is estimated to be worth about £1.75bn.

Scottish transport company First Group will operate the 95 per cent of rail services in Scotland, as well as the sleeper service link to London.

The group, which carries 180 million people a year on its 1,700 buses, is expected to improve reliability and reduce overcrowding on trains across Scotland.

The contract includes a government subsidy of more than £200m a year.

Arriva, First and National Express were all in the running for the contract.

Scotland's transport minister Nicol Stephen said: "The decision to appoint First Group 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."

Arriva chief executive Bob Davies said: "We submitted a robust bid, which we believe would have delivered high quality rail services for Scotland."