According to a common wisdom persistent in developing countries, railways are technically outdated and are unable to play larger role in contemporary economic systems. The author contrasts these clichés with data on market performance of railways in mature economic systems. He presents a description of markets where railways are successful and discusses the importance of railways for the development of urbanised areas, as well as the economic factors that distort the competition with other transport modes. He presents also the review of the literature on causes of poor performance of state-owned railways and factors leading to railway reforms. Then debates the issue of vertical integration verus vertical separation, i.e. railways as a monopoly combined with infrastructure, versus the infrastructure company separated from the train operating companies. He also discusses problems with unrestricted competition among train operators arising from such divisions given the technical limitations of the railway infrastructure. He concludes that under technical restrictions franchising can be the best solution as a strategy to reform the market.