Leading Article: When it comes to the railways, don't get mad, get even

WHAT IS to be done about our railways? John Prescott has been huffing and puffing like Thomas the Tank Engine, but to no effect. "Passengers deserve much better," he said in May last year. "It is broke - I intend to fix it," he said of the rail system in August. "I'll call time on the companies that run the trains," he tub-thumped at Labour conference last September. But when the train companies miss their targets, or are even found to be in breach of their franchise agreements, what happens? They get told off, they are given fines - although sometimes those are cancelled, on the grounds that if they pay the fines the money will come out of passenger services - and the Deputy Prime Minister huffs and puffs some more.

The time has come for action. Mr Prescott has to sack one of the train companies. As well as being the right thing to do, this will please everybody. The Labour Party will love it, because its members still want to know what happened to the "publicly owned, publicly accountable" railway that they thought Tony Blair had promised them. Nationalising a bit of the network while the franchise is put up for auction will cheer those for whom the Morrisonian corporation is the highest form of social and economic organisation. The free marketeers will applaud - or should - because the incentives for success are weak unless they are balanced by real penalties for failure. And the public will love it, because they are fed up and want to see someone get a bloody nose.

But which company should it be? As soon as that question is asked, the problems with the performance indicators published yesterday become evident. Should Silverlink lose its franchise because it was awarded the bottom E grade? No, because it took over the North London Line, which would have been grade Z before and is much better now. And the unfairness of Silverlink's grading is typical of a much wider problem.

The truth is that the railways have improved since privatisation, but from such a low base that the 14 per cent increase in passenger traffic means that more people have more to complain about. The growth in rail traffic has come as a surprise to the Conservative ministers who designed the regulatory regime, and proves that they had no confidence in privatisation. They believed the propaganda of their opponents - including those in the Tory party who dubbed it the "poll tax on wheels".

The railways were sold off under a regime designed to deal with stable or declining traffic; but, not surprisingly, private companies turned out to be better at marketing than the bureaucrats and train buffs of British Rail. So now we have a system of perverse or misguided incentives. Nine-tenths of Railtrack's income is fixed, so it has no incentive to carry more trains - while the train companies, having attracted more passengers, are being castigated for overcrowding, congestion and delays. What is more, the long-term outlook for the railways must be one of sustained growth, if only because the forecast growth in road traffic cannot be carried on the existing network.

Mr Prescott should be praised for getting rid of the rail regulators, John O'Brien and John Swift, who proved themselves to be ineffectual. But he should ensure that their successors set up a better system of carrots to reward companies that succeed in attracting more passengers.

However, Mr Prescott should carry a big stick too. Last August, North Western Trains withdrew services altogether for five days on the Manchester- Oldham-Rochdale loop. For this breach of its franchise it was required to offer two weeks' free travel and to agree a "recovery plan". It should have lost the franchise. Once he has reviewed the franchise terms to make sure they reward success, Mr Prescott should huff and puff no more. The next company in breach of contract should be out.