Run the railways with your budget carved up like a turkey? Someone's got to do it

John Armitt tells Clayton Hirst of the tough choices he's making at Network Rail

If you live in rural Britain and thought your local rail service couldn't get much worse, then you had better mark the second week of December on your calendar. One of these dates could be a black day for Britain's railways.

Forty years since the publication of the Beeching report, which led to hundreds of local rail links being ripped up, Britain's branch lines could be the target of another wave of spending cuts.

The exact date and time have yet to be finalised but at some point during that week the rail regulator, Tom Winsor, will rule on exactly how much money Network Rail is allowed to spend. What is becoming clear is that it will be many billions less than Network Rail had originally budgeted for. The not-for-dividend company that replaced Railtrack was supposed to herald a fresh start for the country's railways, but its budget has been carved up like a turkey. It has already conceded a £5bn cut; if the regulator gets his way next month, another £1.8bn will be lopped off.

This leaves Network Rail with two stark choices: spread its money thinly across the network or spend it on the busiest routes. John Armitt, the softly spoken chief executive of Network Rail, has already made the difficult choice - and it won't please Britain's rural communities.

"If we are to prioritise our spend, we will have to focus it on where it will have the biggest impact. This happens to be commuter and inter-city routes," he says. "Out of a £1.8bn cut I would expect more than 50 per cent will have to be saved by deferring renewals work." The cuts, he says, would be made on rural routes. "Clearly, the overall impact of a five- or 10-minute delay in Cumbria, Cornwall or East Anglia is not that great."

The result will be all too familiar to rural train travellers: more speed restrictions and longer delays. But metropolitan users will also be hit by the railway cash squeeze. Armitt reveals he is in talks with the Strategic Rail Authority's chairman, Richard Bowker, about cutting £1.5bn off the long-delayed £9.9bn project to upgrade the West Coast Mainline between London and Glasgow. "We are currently very advanced in our thinking with the SRA," says Armitt. "We will reduce the budget by looking at things we can defer or take out of the project."

Network Rail is, however, still on course to hit its two West Coast targets. Armitt says the first phase from Glasgow to Crewe will be completed by next September, allowing tilting trains to reach speeds of 125mph. The whole route will be in operation by December 2005. However, a reduction in renewals work will leave trains crawling along certain parts of the track.

It wasn't supposed to be like this. When the former transport minister Stephen Byers clumsily pulled the plug on Railtrack and replaced it with Network Rail, the plan was for the new company to be fully funded to tackle the backlog of renewals and maintenance. Two years on, Armitt says it could take six years to get train punctuality back to the same level as before the Hatfield crash of October 2000.

Between now and 2009 Network Rail has punctuality targets to meet if it is to trigger executive bonuses. But already, it is likely to miss its first target of 82 per cent punctuality by the end of next March. Last summer's heatwave caused widespread problems, and Network Rail's performance currently languishes at 79.6 per cent.

"I wouldn't put money [on meeting the target] today, that's for sure. I think it's going to be a real challenge," concedes Armitt.

Highly rated in the rail industry, Armitt was appointed chief executive of Railtrack while it was in administration. A chartered civil engineer and the former chief executive of the construction company Costain, he held on to his post when Railtrack was reborn as Network Rail. His plan at Network Rail has been to focus on engineering, unravelling the tangle of commercial ventures - such as property development - that Railtrack dabbled in. The change has permeated the organisation.

Armitt says his ultimate aim is to make Network Rail "dull". Unfortunately, it is far from that. Last month, the company rocked the City by announcing it was to bring all maintenance work in-house. This enraged its private contractors, which were given little warning and suffered heavy falls in their share prices.

"I have sympathy for them," says Armitt, "because as an ex-contractor I can put myself in their position. If you get a phone call at seven o' clock in the evening saying, 'Look guys, there's going to be an announcement tomorrow morning', then yeah, I'd be dis- appointed. [But] I don't think that realistically any of them were that surprised because I have no doubt they will have sat in their boardrooms over the last year saying, 'I wonder if ...? Do you think Network Rail is likely to ...?'"

Network Rail believes it will save £300m a year by taking on 18,500 railway engineers from the private firms. But change will come at a cost.

"There will be [compensation] payments which we will make to the contractors," Armitt says, adding: "I am not going to say exactly how much we have allowed - this is a commercial negotiation. Given that there are seven contractors then it is going to be more than £10m." He believes this will be money well spent, ending a culture of work avoidance among some staff: "We need to get the guys at the sharp end rather than sitting in the van - remove the excuses for not being able to work. The challenge is very much one of logistics: the right number of men, in the right place, with the right materials and equipment. The day-to-day success of the railway actually depends on their performance."

With 18,500 new employees to manage, a £1.8bn budget cut on the cards and potential flak over the West Coast Mainline, there are probably easier ways to earn £450,000 a year than being boss of Network Rail.

"You're right," Armitt admits. "It isn't an easy job but I hope I'm helping people." Let's hope the travelling public, which will have to wait years before they see any real improvements to the railways, see it the same way.