Our deep concerns about the spiralling costs and poor performance of railways in Great Britain led us to announce an inquiry into the future of the railway last year. We received a strong response which raised a large number of further fundamental issues, including the effect on railway regulation, performance and growth of the industry's present highly fragmented state. Our report addresses this, and identifies extremely serious systemic flaws in the present organisation of the railway.

The main problems we uncovered were:

• The Rail Regulator is solely responsible for determining the amount of funding Network Rail receives. His decision is binding upon the Government. In addition, although Network Rail is a private company it requires to be guaranteed by the Government. However, as a private company it is denied access to the cheapest forms of Government loans. Consequently, Network Rail's borrowing is more expensive than if it were in the public sector.

• The Rail Regulator has prescribed the level of maintenance and renewals funding that Network Rail requires to undertake over the next five years from April, thereby duplicating the work of the company's management. The present regulatory arrangements did not prevent the disaster of Railtrack; and in a number of important respects, such as Network Rail's asset control, they have not performed well. Costs have still not been brought under control.

• Network Rail's ownership structure is unacceptably weak, and its ability to forecast accurately future funding requirements has been demonstrably poor.

• The Strategic Rail Authority (SRA) is expected to set targets, determine outputs, grow and lead the industry as a whole, yet it has no control over the infrastructure which largely determines overall rail performance. There is therefore a serious mismatch between the SRA's objectives, powers and responsibilities.

• The regulation of rail safety is undertaken by the Health and Safety Executive. We found that the industry believes that the HSE has failed to take fully into account the industry's present record when assessing risk; that this may have led to higher safety costs than necessary; and that, as a consequence, the HSE has lost the trust of the industry.

We have concluded that the industry is not fit for purpose, and that if these major problems are to be solved, the railway's present inability to deliver key projects effectively corrected, and its focus on excellent service delivery to the travelling public strengthened, as it must be, a fundamental reorganisation of the railway is required. While reorganisation will entail disruption, the railway is unlikely to perform significantly better unless the existing bodies are replaced.

Our main recommendations are:

• A public sector Railway Agency is needed. This new executive body would combine the strategy and output delivery functions of the SRA with control of the infrastructure, and must be given all the powers required to manage the entire rail system and to deliver excellent services for the travelling public. Combining these functions will permit the body responsible for growth and targets also to manage the means of achieving improvements, and to receive funding at the cheapest level. However, this body must demonstrate a much greater creativity and vigour than its predecessors if these new arrangements are to have a chance of working. The travelling public do not care who runs railway services; their concern, quite properly, is with efficiency and value for money. While the private sector may therefore continue to provide some train and infrastructure services, where that clearly provides the best option, the Government needs to keep an open mind on the provision of these services directly by the public sector.

• Economic regulation of the railway, as presently organised, has largely failed. However, if the private sector continues to be involved, there will be a role in future for a measure of independent economic regulation to 'hold the ring' between the infrastructure provider and the private sector companies. But the Government must take back into its own hands decisions about the sums which will be spent on the railway. This will correct the present absurd position in which the Government simply underwrites the Regulator's funding decisions. Economic regulation should be removed from functions which are properly those of Government.

• All parts of the industry and the safety regulator need to work co-operatively to provide a progressively safer, effective and efficient environment for those who work on, and travel by, rail. Our evidence suggested strongly that the HSE's relationships with important parts of the industry have broken down. In these circumstances, there cannot be full public confidence in the present regulatory arrangements for rail safety. Consideration should be given, therefore, to removing the regulation of rail safety from the HSE, and for Her Majesty's Railway Inspectorate either to be made a free standing Agency of the Department for Transport or merged with the new Railway Agency.

Demand for rail is strong, and it is impossible to imagine that the railway will not continue to be required. It is essential, therefore, that costs are controlled and performance improves. In January the Government announced a review of the structure of the railway. We welcome this review. A new beginning for the railway is needed. The mistakes and 'drift' of the last ten years need to be corrected. We do not underestimate the size of this task. We have mapped out in this report what steps for organisational change will be required to assure the future of the railway. We hope that the Government will accept the real challenges of railway restructuring.