There is an air of unreality about the demands that the Rail Regulator has laid out for Network Rail over the next five years. The regulator is demanding that Network Rail improve punctuality and deliver major new infrastructure projects. The question that springs to mind on reading this ambitious list is: what will happen if Network Rail fails to deliver? The precedents are not encouraging.

Rail passengers will recall the terrible disruption last New Year, when there were major engineering overruns in Glasgow, Rugby and London. Tens of thousands of travellers were inconvenienced. Network Rail was fined a record £14m by the rail regulator. But because Network Rail is a publicly-owned company, with no private shareholders, the fine was merely picked up by taxpayers, many of whom had suffered from the disruption in the first place.

But this is merely one aspect of the madness of railway economics in Britain. More people are using the railways than at any time since 1945. The result is overcrowding on several major routes. And yet the response of the train operators has not been to put on more trains, but to increase fares. We have an industry that rewards its customers by making their travel experience more miserable and charging them extra for it.

So what is to be done? There are two major problems with Britain's railway system that need to be distinguished. The first is the incompetence of Network Rail and several of the private train operating companies. This is not a funding issue, but a management one. If money is an issue, it lies in the fact that the managers are presently rewarded for failure. Three Network Rail directors received bonuses of £200,000 this year, despite the New Year overruns debacle. The Government needs to look again at those charged with delivering our rail services. Incentive schemes which end up rewarding incompetence must be torn up.

But there is a second, larger, problem and that is the Government's stubborn refusal to invest in the rail network on the scale necessary to deliver an efficient, modern transport system. The stewards of our rail system are often incompetent, but the blame for the often appalling condition of our rail services must be shared with ministers who have been quietly allowing the public subsidy to dwindle.

Unveiling the Government's five-year rail plan last year, the then Transport Secretary, Ruth Kelly, rejected greater electrification of the network and more high-speed rail as "too expensive". The hypocrisy and short-sightedness of this is immense. The Government is pushing ambitious targets for cutting greenhouse emissions through the House of Commons, and yet it is squeezing rail (the greenest form of public transport) and lavishing favours on the airline industry. Ministers are demanding that individuals reduce their carbon footprint, and yet they preside over a transport system in which it is cheaper to fly between London and Glasgow than it is to take the train.

There are signs that this might be changing. The new Transport Secretary, Geoff Hoon, this week promised to review the case for high-speed rail lines. And the Conservatives' endorsement of a new high-speed North-South rail line confirms which way the political wind is blowing.

But the proof will be in the delivery. Passengers, long squeezed between the incompetence of railway managers and the hypocrisy of ministers, will believe in the new strategy when they see it being put into effect.