Transport secretary Alistair Darling has defended the deal to hand Britain's railway infrastructure to the not-for-profit organisation Network Rail.

Under the terms of the arrangement, Network Rail will buy the assets of Railtrack Plc for £500 million, with the cash enabling Railtrack Group to deliver more compensation to shareholders.

Darling told MPs that the government is, through the 10 year plan, increasing the average annual investment in the railways - on top of continued support for running costs - to £4.6 billion.

"These are large sums by any standards. But they are necessary, given the size of the task facing Network Rail, and they would be needed by any successor to Railtrack.

"There is no escaping the fact that Britain's railways need very large-scale investment - investment we believe is essential," the secretary of state told MPs.

"The public is entitled to expect that this investment will be spent efficiently and effectively. That has clearly not been the case in the past."

He said that Network Rail offered the industry a brighter future.

"What is now needed is a competent owner and operator - and that is why Network Rail's acquisition of the railway network is so essential to the future of the industry," he added.

Shadow transport secretary, Theresa May said the government's decision to place Railtrack into administration had cost more than bailing out the company would have done.

"Unlike the caricature that this government tried to create, the people really wronged were not fat cats but thousands of employees and vulnerable pensioners whose savings were put at risk," she said.

"When the government put Railtrack into administration, the former secretary of state said, 'I decided that I could not give Railtrack a blank cheque'. At the time, Railtrack was looking at a possible financial requirement of £1.7 billion.

"Now we see the government guaranteeing funding of up to £21 billion, £21 billion of taxpayers money. They said they wouldn't give a blank cheque but that is exactly what they are doing."

Liberal Democrat spokesman Don Foster welcomed the statement, but criticised the decision to award shareholders more compensation.

"I simply do not see what justification there is for further compensation to the shareholders, particularly in the light of his predecessor's [Stephen Byers'] assurance that such compensation would not be forthcoming," he said.

But the chairman of Railtrack Group, Geoffrey Howe, welcomed the deal.

He said the package was "in the best interest of shareholders".

The deal includes £80 million for Network Rail's purchase of the right to run and maintain the Channel Tunnel high-speed rail link.

The link itself will be purchased by London and Continental Railways for £295 million.

But the two agreements need to be approved by Railtrack shareholders at a general meeting - which is expected in July.

If they get the green light, the deals will allow the company to pay compensation of shareholders of between £2.45 and £2.55 per share.

The first instalment - of between £1.60 and £1.80 - will be received by January 2003.

Railtrack shares initially fell to £2.21 as trading resumed on Thursday for the first time since Stephen Byers' moved to place the company in administration last October.

At suspension the shares were trading at £2.80 to £2.23, a far cry from their £17 per share high.

But the approval of shareholders is not the only obstacle facing the deal.

It will need to secure the approval of the European Commission, as £300 million of the £500 million is provided by the Strategic Rail Authority.

The government has also come under fire for an accounting decision that will see billions of pounds in SRA debt guarantees to Network Rail kept off the government's books.

But industry figures said it was time for the rail network to move forward.

Ian McAllister, chairman of Network Rail, pledged that the railways would be taken out of administration as soon as is possible.

"This is a significant step forward for our plans to deliver safe, reliable and efficient rail infrastructure. Network Rail will deliver Railtrack out of administration at the earliest opportunity," he said.

"I am particularly pleased that the period of uncertainty facing Railtrack staff is nearly over. We attach considerable importance to retaining the skills and expertise of the Group's shareholders to approve this transaction."

However, the chairman of the Railtrack Private Shareholders' Action Group, Adrian Chalklen, pledged to vote against the deal at the group's extraordinary general meeting.

"We are extremely disappointed that, after a frustrating delay, Railtrack's board has recommended acceptance of the totally inadequate offer from the government," he said.

"We have urged it to fight on for its shareholders but it has apparently flunked that challenge. Shareholders will fight on."

He accused the government of renationalising the rail network by "subterfuge".

"The campaign the shareholders and the company have waged since October last year brought a climbdown by Mr Byers but still the government wants to abuse our rights by its offer. We believe that Railtrack Plc is worth much more than the £500 million on the table, a figure that the government has never attempted to justify," he added.

But there was a welcome for the announcement from the Rail Passengers Council.

"The uncertainty over Railtrack's future was detrimental to progress and change. While this deal has yet to be ratified by the shareholders, I hope that this announcement heralds a fresh start for the rail industry," said chairman Stewart Francis.

The Transport and Salaried Staff Association was also upbeat about the move.

"It's now time to look forward and not dwell on the past. We want to see the company at the heart of the railway network, looking after the interests of passengers, not shareholders," said general secretary Richard Rosser.

Under the terms of the Network Rail deal any profits made by the body will be invested into the railways.