4 October 2012 Last updated at 05:58 ET
The four rival companies will be reimbursed for the cost of their bids
Whitehall must pay more to attract the best civil servants, Lord O'Donnell has said, after three were suspended over the West Coast Main Line bid process.
The ex-civil service head told BBC Radio 4's Today programme there were skills shortages in areas where the private sector paid "vastly more".
The decision to award the West Coast route to FirstGroup has been scrapped because of bidding process "flaws".
Lord O'Donnell also said ministers were wrong to criticise civil servants.
The three civil servants - who face possible further disciplinary action pending an investigation - have been suspended after the government admitted major failings over the contract to run the rail line.
Transport Secretary Patrick McLoughlin has said a "terrible mistake" in evaluating the relative merits of four bids had been made by Department for Transport staff and the "fault lies wholly and squarely" with it.
Staff reportedly failed to include predicted passenger numbers and inflation forecasts in some of the risk assessments of the rival bids from firms including Sir Richard Branson's Virgin Trains.
Mr McLoughlin said the estimated cost of reimbursing the four companies for the cost of their bids would be £40m.
Lord O'Donnell, who retired as cabinet secretary after the coalition came into power, said the debacle "does raise some issues about skills in the civil service".
"There are civil servants up and down the country doing great jobs, but we are suffering in some areas where there are skills shortages - in the commissioning area, in the procurement area," he said.
Some "hard-headed commercial procurement" staff were being lured away by bigger salaries in the private sector, he added.
He said paying bigger salaries in the civil service was "part of the answer and we should be prepared to do that" but added that "having an arbitrary constraint like the prime minister's salary isn't helpful".
He added that, while civil servants accepted pay freezes in "a time of austerity", they wanted ministers "to make sure they're doing a good job and praise them".
"The thing that they're doing which, I think, is self-defeating is attacking their own staff - that's a mistake," Lord O'Donnell added.
'Incredibly bright'Labour MP Margaret Hodge, chair of the Commons Public Accounts Committee, meanwhile, said the affair was "yet another example... of where the civil servants themselves have not really captured and taken on the role that is expected of them in today's society".
She told Today: "People came into the civil service in the past because they were interested in policy, they wanted to devise policy.
"Today, the job of a civil servant is much more about delivering programmes, and that requires a different set of skills."
More training was needed to help "incredibly bright, talented, committed" civil servants to successfully manage projects, she added.
And she said the affair had "exposed in a very stark way that the present conventions on accountability between civil servants and ministers to Parliament and the public aren't working".
The Cabinet Office, meanwhile, has said it has already laid out proposals to improve procurement and project management in a civil service reform plan published in the summer.
A spokesman said actions "already under way since the launch of this plan mean the civil service will be more commercially and digitally capable".
"We know that this kind of reform requires culture change across Whitehall," he added.
"The demand for change isn't just coming from ministers - it comes from civil servants themselves, many of whom have told us of their daily frustrations with a culture that can be overly bureaucratic, hierarchical and too focused on process not outcomes."
Lord O'Donnell's successor as head of the civil service, Sir Bob Kerslake, wrote on Twitter: "Tough headlines for the civil service today. Clear errors made on West Coast franchise. Need to learn lessons from this for the future."
Whitehall must pay more to attract the best civil servants, Lord O'Donnell has said, after three were suspended over the West Coast Main Line bid process.
The ex-civil service head told BBC Radio 4's Today programme there were skills shortages in areas where the private sector paid "vastly more".
The decision to award the West Coast route to FirstGroup has been scrapped because of bidding process "flaws".
Lord O'Donnell also said ministers were wrong to criticise civil servants.
The three civil servants - who face possible further disciplinary action pending an investigation - have been suspended after the government admitted major failings over the contract to run the rail line.
Transport Secretary Patrick McLoughlin has said a "terrible mistake" in evaluating the relative merits of four bids had been made by Department for Transport staff and the "fault lies wholly and squarely" with it.
Staff reportedly failed to include predicted passenger numbers and inflation forecasts in some of the risk assessments of the rival bids from firms including Sir Richard Branson's Virgin Trains.
Mr McLoughlin said the estimated cost of reimbursing the four companies for the cost of their bids would be £40m.
Lord O'Donnell, who retired as cabinet secretary after the coalition came into power, said the debacle "does raise some issues about skills in the civil service".
"There are civil servants up and down the country doing great jobs, but we are suffering in some areas where there are skills shortages - in the commissioning area, in the procurement area," he said.
Some "hard-headed commercial procurement" staff were being lured away by bigger salaries in the private sector, he added.
He said paying bigger salaries in the civil service was "part of the answer and we should be prepared to do that" but added that "having an arbitrary constraint like the prime minister's salary isn't helpful".
He added that, while civil servants accepted pay freezes in "a time of austerity", they wanted ministers "to make sure they're doing a good job and praise them".
"The thing that they're doing which, I think, is self-defeating is attacking their own staff - that's a mistake," Lord O'Donnell added.
'Incredibly bright'Labour MP Margaret Hodge, chair of the Commons Public Accounts Committee, meanwhile, said the affair was "yet another example... of where the civil servants themselves have not really captured and taken on the role that is expected of them in today's society".
She told Today: "People came into the civil service in the past because they were interested in policy, they wanted to devise policy.
"Today, the job of a civil servant is much more about delivering programmes, and that requires a different set of skills."
More training was needed to help "incredibly bright, talented, committed" civil servants to successfully manage projects, she added.
And she said the affair had "exposed in a very stark way that the present conventions on accountability between civil servants and ministers to Parliament and the public aren't working".
The Cabinet Office, meanwhile, has said it has already laid out proposals to improve procurement and project management in a civil service reform plan published in the summer.
A spokesman said actions "already under way since the launch of this plan mean the civil service will be more commercially and digitally capable".
"We know that this kind of reform requires culture change across Whitehall," he added.
"The demand for change isn't just coming from ministers - it comes from civil servants themselves, many of whom have told us of their daily frustrations with a culture that can be overly bureaucratic, hierarchical and too focused on process not outcomes."
Lord O'Donnell's successor as head of the civil service, Sir Bob Kerslake, wrote on Twitter: "Tough headlines for the civil service today. Clear errors made on West Coast franchise. Need to learn lessons from this for the future."