Network Rail faces losing its monopoly over Britain’s rail infrastructure if it fails to meet tough new targets to improve punctuality and reduce costs, according to the rail regulator.

Bill Emery, chief executive of the Office of Rail Regulation (ORR), told The Times that at least one rival infrastructure company was needed to gauge Network Rail’s performance.

Network Rail was created by the Government in 2002 to replace Railtrack. It is technically a private company, but it has no shareholders and is dependent on public subsidy.

The ORR will announce on Thursday how much income Network Rail will receive between 2009 and 2014. It is expected to give Network Rail £1 billion a year less by 2014 than the company claims it needs, a 25 per cent cut in its running costs. The Government has set an industry target of 92.6 per cent of trains to run on time by 2014, up from 90 per cent at present.

Network Rail has made steady progress in reducing costs, but it has failed to meet its own targets for cutting delays and still consumes three times as much subsidy as British Rail did. It is also less efficient than several publicly owned networks on the Continent, according to ORR research. The ORR has fined Network Rail twice in the past year for overrunning engineering works that have affected hundreds of thousands of passengers.

Mr Emery said that Network Rail had one last chance to prove that the current industry structure could work. Referring to the punctuality and efficiency targets, he said: “If they don’t rise to these challenges, then there is a real, legitimate question as to whether the structure is right.”

He criticised Network Rail for jealously protecting its monopoly and refusing a proposal from Merseytravel, the public transport authority on Merseyside, to run its own tracks. Merseytravel wanted to combine track and train operations for the first time since privatisation. The change could have saved up to £30million a year and delivered better performance.

Mr Emery said: “It would have tested whether working closely together as a vertically integrated piece of railway would lead to a better performance and lower costs.”

He said that a better structure could be to reintegrate tracks and trains into “city regions”, giving local authorities greater powers to improve services. Mr Emery, the former chief engineer of Ofwat, the water regulator, added that the railways could learn from the water industry, which is split into regional monopolies. Ofwat measures the companies’ performances against each other when setting their targets. While the ORR does not have direct power to alter the structure of the industry, it can put financial pressure on Network Rail to reform itself.

Mr Emery said that the ORR could decide to reduce Network Rail’s income to the lower level that might be needed by more efficient regional track companies. The Conservatives are considering how the rail industry could be restructured and are looking closely at the idea of splitting up Network Rail into a number of regional integrated track and train companies.

The danger signals

May 2008 Thousands of travellers to London were delayed or forced to abandon their journey when signals near Milton Keynes failed a few days after May Bank Holiday improvement work. Many trains into London Euston were cancelled

March 2008 Commuters experienced long delays when engineering works scheduled for the Easter Bank Holiday overran in East Anglia. Many trains into London Liverpool Street, which had been closed over the holiday, were cancelled and more were delayed

February 2008Network Rail apologised after thousands of football fans travelling to the FA Cup Final at the Millennium Stadium in Cardiff missed the kick-off and then spent hours queueing for trains home after a fault with signals

December 2007 to January 2008 Network Rail was fined £14 million by the Rail Regulator after work on tracks near Rugby went on four days longer than planned, causing major disruption and bringing many services to a standstill

Sources: agencies; Times archive

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive