Is this the end of the line for the privatised railways?

It may seem incredible, but this year taxpayers are forking out £5.3bn to to keep the private railway system in business, four times more than they had to in the supposedly bad old days of British Rail. To add to that, there are twice as many late trains as when they were operated by the state.

It may seem incredible, but this year taxpayers are forking out £5.3bn to to keep the private railway system in business, four times more than they had to in the supposedly bad old days of British Rail. To add to that, there are twice as many late trains as when they were operated by the state.

The privatised railway, which was supposed to offer efficiency, choice and, above all, cost saving for both the Government and passengers, has been nothing less than a disaster. The rail review was launched in Parliament in January by the Secretary of State for Transport, Alistair Darling, because ministers realised that they were pouring money into a seemingly bottomless pit as services got worse and worse.

The Hatfield train crash, the high profits of the private companies, the rising costs of projects such as the West Coast Main Line modernisation, increased safety requirements and the inefficiency caused by having so many companies involved in a small industry have meant that taxpayers have faced an ever-increasing bill. The final straw for ministers came when Tom Winsor, the rail regulator, allocated £7bn more to Network Rail over the next five years than the Government had budgeted for.

Mr Darling told the Commons on 19 January: "There [is] a very serious difficulty facing this industry: that is its structure and organisation. The way in which it was privatised has led to a fragmentation, excessive complication and dysfunctionality that have compounded the problems caused by decades of under-investment. There are too many organisations, some with overlapping responsibilities. And it has become increasingly clear that this gets in the way of effective decision-making and frequently leads to unnecessary disputes." In other words, ministers wanted to get their hands back on the controls.

Like the original privatisation Bill, the draft of the rail review has all the hallmarks of a document cobbled together in a rush by bright civil servants with little knowledge of the workings of the rail industry. The imperative this time round is to cut the soaring costs to the taxpayer rather than collect a lot of money and watch the industry slide into decline, although like all of the reviews since privatisation it tinkers at the edges rather than addressing the real issues.

The document highlights the extent to which the Labour government has been unable to get a grip on an industry whose privatisation ministers now accept was "botched" but which they steadfastly refuse to reverse in its entirety. Instead, the review will result in yet another attempt to impose new rules on a system that was, is and will remain unworkable.

The review has been overseen by two people with little experience of the railways: Sue Killen, a recent recruit from the Home Office who is director general of railways at the Department of Transport, and Nick Macpherson, managing director of the budget and public finances directorate in the Treasury. It was the Treasury that designed the original framework for privatisation, which has proved such a costly failure.

Although there are some useful changes and the new structure marks another small step in the long retreat from a fully privatised railway, the review still fails to get to grips with the central problem of the railway: its fragmentation into different companies linked through contracts that have proved to be expensive to manage. The document admits that restructuring the railways may be of limited use when it says the final version "will have to stress the limits of what can be achieved via structural reform".

This initial restructuring is not seen as final. Indeed, the document stresses that the "structure should be amendable without new legislation"; for example, if Network Rail's oversight of franchises does not work effectively, "Network Rail could be reclassified to the public sector".

The review was launched in January with the idea of trying to rein back the soaring cost of the railway and reasserting government control over the spending. Ministers felt any control had been usurped by the rail regulator, Tom Winsor, who decided in March that Network Rail should be allowed to spend £22.2bn over the next five years, £7bn more than the Government originally envisaged.

Under the new system, the Government would ensure that the new Office of Rail Regulation would be allowed to allocate what was in its budget only through an "iterative process" of negotiation. However, ministers are hamstrung by their promise that there will still be "independent economic regulation", and it is unclear if they would be able to exert control over spending.

There is no doubt, though, that ministers will have a much bigger say in how the railways will be run. The abolition of the Strategic Rail Authority shows the extent to which Labour has floundered over the rail issue. The document says the whole concept of a strategic authority was flawed; it is not being abolished "because it has failed" but because "it does not have sufficient autonomy to become the single decision maker".

Instead, the Secretary of State will determine the strategic direction of the railway, set the level of regulated fares and decide on how much public subsidy is available. A new team within the Department for Transport will be created, together with a new agency that will let contracts to franchisees. There will be fewer franchises - 15 rather than 25 - and these are likely to be let on a longer-term basis.

Network Rail, the not-for-dividend body that replaced Railtrack, will also have added powers, controlling the timetable and safety standards. Although train operators will retain fares they collect - a reversal of a previous plan to centralise fare collection - they will work to a timetable set by Network Rail and will not, as now, have the freedom to change it.

However, the Government has shied away from the solution proposed by many industry insiders - the integration of train operators with Network Rail - because ministers are unwilling to pay compensation to existing franchisees. Instead, it leaves the door open to vertical integration which could be created "by establishing joint ventures between Network Rail regions and TOCs [train operating companies]".

However, new franchisees will "operate under contracts which are simpler than the existing regime". Instead of lengthy service standards, the contracts will be designed to ensure that the specified timetable is operated punctually. Therefore the complex system of compensation payments between operators and Network Rail will be abolished but operators that get into financial trouble of their own making "will not be rescued".

Although this review document is a draft, it suggests that, far from being a once-and-for-all change in the industry, it is yet another fudge that does not get to grips with fundamental failings. However, the key point is that unless the railways can cut back on the £5.3bn they are spending this year, they will face major reductions in services.

Additional reporting by Steve Bloomfield. Christian Wolmar's new book, 'The Subterranean Railway', will be published in November

THE PRIVATISATION FIASCO

1996: British Rail privatised. Running of trains separated from ownership of track. Flotation raises £1.9bn.

5 Oct 1999: Two trains collide at Ladbroke Grove, killing 31.

17 Oct 2000: Four people are killed and 35 hurt when a GNER train derails at Hatfield.

8 Oct 2001: Railtrack placed in administration with debts exceeding £3bn.

10 May 2002: London to King's Lynn service derails at Potters Bar, killing seven and injuring more than 70.

28 May 2002: Stephen Byers resigns as Transport Secretary and is replaced by Alistair Darling.

May 2003: 53 miles of the West Coast Main Line is closed for five months between Crewe and Stafford for engineering works.

Jan 2004: Alistair Darling announces new rail review.

March 2004: Network Rail admits punctuality will not reach 90 per cent until 2009.