The entire rail industry will be probed by an expert panel led by former British Airways chief executive Keith Williams, with the aim of bringing about reform of the franchise system by 2020.
It follows a dire year for rail, with the collapse of the Virgin Trains East Coast franchise, unprecedented delays and cancellations in the North summer timetabling chaos, and punctuality falling to a 12-year low.
The review has been described by the Department for Transport as the most significant since the privatisation of the railways in the 1990s, and it will look at ensuring a better balance between public and private involvement.
Mr Grayling said: “Privatisation has delivered huge benefits of passengers on Britain’s railways – doubling passenger journeys and bringing in billions of private investment.
“But it is clear that the structure we inherited is no longer fit to meet today’s challenges and cope with increasing customer demand.
“We’ve been clear that the railway needs reform to prioritise its passengers, and we have set out plans for closer partnerships between operators of track and train, including on the LNER and South Eastern networks.
"But as part of our vision for the future of mobility, we need to go further and more quickly, to get he best from the public and private sectors and deliver the railway we need for the 21st Century.”
The review will consider “ambitious” recommendations for reforms, including moves to bring track and train closer together to reduce disruption and improve accountability - a major issue highlighted by the timetabling misery in May and June.
It will also look at how the fare system can deliver better value for money passengers, while also looking to improve industrial relations to avoid strikes which can cripple networks.
Regional partnerships will also fall under the scope of the probe.
The panel will include Roger Marsh, who chairs the body representing the 11 Local Enterprise Partnerships in the North.
Shadow Transport Secretary Andy McDonald said: “Rail passengers don’t need another review from the Tories to tell them that rail is broken. Another review is meaningless in a year of rocketing fares, failing franchises and timetabling chaos. Another review lets Chris Grayling off the hook. The railways need a Labour government which will deliver public ownership of rail.”