A stand-off is looming between the owner of Britain’s rail infrastructure and its regulator after the Office of Rail Regulation ruled that Network Rail would receive less income over the next five years than it has demanded.

In a ruling published on Thursday, the ORR said Network Rail would be permitted income of £26.7bn ($43.4bn) from government subsidies, train operators and freight companies over the five-year period starting in April. The figure is £2.4bn less than Network Rail demanded and only £200m more than ORR outlined in its draft figures in June, when it was told by the company that the sum was “insufficient”.

The gap between the two sides stems mainly from different expectations of the rate at which Network Rail will improve the efficiency of its basic operations. The ORR ruling requires Network Rail to cut its cost per unit of work done in operating, maintaining and renewing the existing network by 21 per cent by 2013-14. Network Rail believes that such a schedule is impossible.

The ORR has also simplified some improvement schemes that Network Rail had planned to make but that it thought unnecessarily elaborate. A few small improvement schemes have been removed from the plan.

The ORR’s ruling marks the final stage in a three-year review of the rail infrastructure company’s funding. The Department for Transport has used the review to cut the costs to taxpayers of funding the railways and cater for some of the substantial passenger and freight growth that the system is experiencing.

Network Rail will invest £7.74bn in improvement projects over the five years, with £2.75bn of the spending going on a transformation of the northern end of the cross-London Thameslink line. There will also be a £448m programme to ease the flow of trains through Reading station and £128m on Birmingham New Street, another bottleneck.

Bill Emery, ORR’s chief executive, said the settlement was a balanced package, based on strong evidence. “There’s no doubt that our determination is challenging for Network Rail,” he said. “They have to improve their efficiency and deliver a huge number of improvements for the railways at the same time.” Michael Roberts, chief executive of the Association of Train Operating Companies, said the review was a constructive attempt to balance the need for Network Rail to become more efficient and recognition of the challenge that posed.

However, Paul Plummer, Network Rail’s director of planning and regulation, said the company would have to be sure the targets and investment levels set out by the ORR were both achievable and adequate to meet the growing demands placed on the network.

“We will now take away today’s determination and study and consider the implications it will have on both passengers and freight users and on the industry as a whole,” he said.

Network Rail has until February to decide whether to accept the findings. It can appeal to the competition commission but could face years of uncertainty waiting for a ruling if it did so.

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