Transport minister Jenny Gilruth today confirmed plans to nationalise the Caledonian Sleeper service despite saying its performance had surpassed other train operators.

Addressing MSPs, Ms Gilruth described the Sleeper as a “world class service” that was “thriving”.

But she said Serco’s franchise would be terminated in June, seven years before the end of its 15-year franchise, after rejecting the company’s request for increased funding to cover the remainder of the contract. It has lost £69 million since it began.

The Sleeper will now become an arms length operation of the Scottish Government but would be run separately from ScotRail which was also taken back into public ownership.

Graham Simpson, the Scottish Tories’ transport spokesman, said that the minister’s admission that the service was world class and thriving showed that the decision was ideological.

Challenging the reason for Ms Gilruth’s decision, he said: “The [last] year saw the highest revenue since the start of the franchise.

“She says nothing about how this service could be improved. How can she demonstrate she is getting value for money for taxpayers?”

He asked if the government had requested or received a costed proposal from Serco for a direct contract award.

Ms Gilruth said the re-basing offer did not offer value for the taxpayer and pointed to other franchises in England which were operating successfully under public ownership.

“Having regard to continuing uncertainty regarding market conditions, travel behaviours and ongoing UK rail reform, it was decided that a Direct Award was not viable and that Sleeper services should instead be provided by the Scottish Government in line with their Operator of Last Resort duty

“That is why I have confirmed that, from the expiry of the current franchise, Caledonian Sleeper services will be provided through Scottish Rail Holdings, a company wholly-owned and controlled by the Scottish Government. This is in line with our Operator of Last Resort duty.

“Caledonian Sleeper staff will transfer to the new Scottish Government owned entity, with their terms and conditions protected.

“This approach will provide a stable platform for Sleeper services and certainty for passengers and staff.”

Neil Bibby for Labour welcomed the decision but “fundamentally disagreed” with the decision not to reunite the Sleeper and ScotRail operations under one service.

John Whitehurst, managing director of Serco’s transport business, said the company was disappointed that the Scottish government “did not ensure value for money by examining the possibility of a direct contract award to Serco”.

He argued that the award would have “allowed Scotland to benefit from the expertise of our Serco Transport senior management team who understand this complex and unique hospitality-focussed train operation like no-one else, while also enabling Scottish ministers to be in complete control of the contract”.

He added: “Most importantly, this would have allowed the Scottish government to compare the price of such an award with that of their arm’s length operator of last resort company.”

Mr Whitehurst also said that since Serco took over the management of the Caledonian Sleeper in 2015, it had brought about “massive improvements to every aspect of the service for our employees, our passengers and for Scotland, despite having made significant losses on the contract”.

Rail union TSSA welcomed the announcement. Interim president, Marios Alexandrou, said: “This decision is certainly welcome because there’s no space for profiteering on Scotland’s railways.  

“The Sleeper is a vital service and was run for many decades successfully under public ownership. Now it will be again and that is a good thing because we need a rail network that runs wholly in the public interest.  

“Serco’s involvement in the service proved costly and chaotic, something which reflects the wider failure of the private sector in our railways.”